Skip to main content

tv   Options Action  CNBC  February 6, 2010 6:00am-6:29am EST

6:00 am
friday night in time square and all the action you need is right here at the nasdaq market site. the world's third largest options exchange. i'm melissa lee, these are the traders. in a late-day rally calling bs on that big fat greek nightmare and may be setting us up for a rally. tonight, tired of losing on vegas? dan's got a strategy that could beat the odds. plus, how would you like to turn $60 into $140? mike's got a strategy that can do just that on intel. and why were all of the options traders betting? scott is here with the set-up. and dan, that late-day bound seems like that is very good
6:01 am
news for stocks. >> well, good news in a week that saw a whole heck of a lot of stuff going on. and one of the things i was scratching my head is i can't remember the last time southern european countries caused so much excitement. that said, you know, there was some reason to be concerned if some of this contagion had kind of moved over to other parts of europe and possibly over to our financial system. that sort of thing. that said, the rally at the end of the day was pretty powerful, you know, and in a week that closed unchanged. >> and we still have very, very heavy put buying at the beginning of today's session, didn't look so good at the end. >> but fortunately it got turned around there at about the middle of the day, which was kind of a surprise. and we talked about the vix. to bring it back to options, we talked about the vix. and the level of option prices, remember, the vix measures the prices on the spx, that is the s&p. and the vix is still making lower lows and lower highs.
6:02 am
and while it is right at the 200-day moving average, until we break through that level convincingly, you have to think options are fairly put. >> i mean, one important thing that i would point out is that although the implied volatility is a little bit higher, that's a natural byproduct of the market being a little lower. from my perspective, with stocks moving around, it provides an interesting opportunity to get long premium and take advantage of the fact that stocks are moving around. and some of them might be getting to beaten up unjustly. we had good results from cisco earlier this week and seeing things that are positive signs. just because i'm not going to use the acronym that barclay's came up with for countries in europe that we're not supposed to mention. but the fact of the matter is, there are some things we should be looking at -- >> you mentioned cisco systems, and that certainly was one stock in a pocket of strength in this week. take a lock at some of these tech moves. we actually saw some of these stocks make some sizable gains to the upside. apple up 2%, cisco up 6% and rimm was up 8%. dan, did it surprise you at all that tech was able to withstand
6:03 am
this? >> those three names showed great relative strength in the financial crisis that we saw in our country back, you know, in '08 into '09. so it makes sense if you think about how those guys are positioned. what their balance sheets look like, what their growth opportunities are. it makes perfect sense to me. cisco right in the middle of the wake gave you the one-two punch why you want to be in those names. >> do you think there's a rebound in technology? will tech continue to go higher? >> the fundamental story you highlighted, strong balance sheets, also what cisco is pointing out which is enterprise spending seems to be coming back. because of the deleveraging that they went through over the course of the previous 18 months. they're in position. if they have any kind of strength, they've got the money to spend and they're starting to. so i think that's one of the reasons why we see this as a area of strength. >> and mike makes a great point about the volatility and being
6:04 am
long options. you know, this week, if you were long options, you could make that pay off. that's not always the case. but boy, we had a ton of volatility up and down. and being long options could've worked for you. >> mike, you've got a trade on intel. why intel? >> well, what we were looking at here, this is a tech name and it's a tech name that actually didn't do as well as some of the other names we mentioned this week. trying to look for a name that potentially might be poised to make a rebound. when i first started to take a look at this, one of the things i was thinking about, very common for me to put the trades on, i'd like to sell the premium. i look for spreads. dan made a great point, looking at intel. he said you might want to be a little bit careful. what i was looking at here was putting on a call spread. and specifically the call spread i was looking at in intel was the april 20/22 call spread. paid 85 cents for the 20s, sell the 22s for a quarter, net, net, i'm going to pay out 55 cents. and obviously this is a trade that's going to capitalize if this thing does get a bounce like some of these other names did. and of course, you're mitigated on the downside.
6:05 am
>> do you like this trade and when intel came out with earnings, there were a lot of people saying intel's signalling a peak when it comes to revenues and real concerns about chip names. and specifically intel because they don't have as much as the mobile exposure as some of the other names. >> even the mobile names. we saw qualcomm last week reporting and broke down in a massive way. intel is, you know, it's a broader pc name. and you don't play intel on the back of cisco's earnings. it's a different story. they're very levered to pcs. and that idea of pc cycles that we all talked about earlier it's out of the water. they're much shorter and different buying habits by the enterprise and consumer. we were talking about the trade structure earlier. i like the call spread better than the risk reversal. i think you want to be really, really careful. we talk about it all the time. when you sell downside puts, you better be prepared to buy it there. and when the stock starts going in that direction, your shortfall and that's a doubly dangerous sort of thing. i like buying premium in these things where you want to get long.
6:06 am
>> in this environment, being short puts is really risky. and let's remember, when you're short puts, that eats up a lot of margin. mike talked about the fact this was an opportunity when the market's bouncing around like this to be long volatility. and that's what he's doing here. i think that's why this makes a lot of sense. >> let's move on. it is time to make another call. what happens in vegas is supposed to stay in vegas. so with lvs, las vegas sands kicking off earnings for the gaming sector, dan worked up a strange with a huge payout and odds that could, in fact, beat the house. of course, obama's comments this week put gaming stocks front and center, but it's really china, dan, you're looking at here. >> yeah, we talked about this. these guys win and las vegas sands very exposed to their operations. and a disproportionate amount of growth going forward. one of the things that got me looking at las vegas sands is it's a very levered company on the balance sheet. but if china starts to put the brakes on in a very meaningful way on their economy, with fears of creating new bubbles and
6:07 am
inflation that sort of thing, it's going to be a really dangerous time to be a long holder of, you know, las vegas sands, that sort of thing. they're supposed to report las vegas sands earnings in a week or so. the quarter's going to be good. numbers out of mccall last week that were very, very good. the stock's stuck in the mud at 15. so if i own this stock or believe that china could affect the growth over the next six months or something like that. i may look to put on a put spread. one of the things i was looking at was a march 14 12 put spread. i was looking at it earlier today. the stock closed much higher. you may want to look at different strike. but one march 14 put for 90 cents and sell one march 12 put for 40 cents against it. the package cost me 50 cents, i can make $1.50, that's three to one payout, i like those odds. if the stock is 14 or higher, i lose that premium, but if i'm long the stock, maybe that's a reasonable way to mitigate about 10% the downside risk.
6:08 am
>> what do you think of dan's thesis and trade? >> i think it's interesting and i love to buy put spreads. my question is why march? if you think this is going to unfold over six months, then maybe -- >> quick answer. they haven't set the reporting date. it's supposed to maybe be next week. but march gives you that time. we talk about it all the time with catalysts, you've got to know where the catalyst -- >> that's an important point. the other thing is if he can capitalize on a little bit of the volatility that we're seeing. stocks are moving around, this one could, that's one of the reasons why march might actually pay off. with respect to how much of the revenues are coming from overseas, we're talking about over 3 billion versus 1.5 billion. they're very exposed on the front there. >> let's move on to your next option. anyone can just buy stocks. but if you really want to put the odds in your favor, you need to learn to buy right.
6:09 am
and with volatility elevated this week, now could be a great time to buy right. breaking it down for us dennis, head of u.s. derivatives at mccory. welcome, dennis, it is great to see you once again. before we get to your trade, we want to tackle that buy-write play book. what do you look for? >> when i look for a buy-write strategy, i look for a strategy 10% out of the money. i look for them to appreciate up 10%. i want to participate in the rally at that stock. >> premium? >> premium, i need to take in at least 3% of the stock price when i sell that call. anything less than that is too inexpensive. i don't like selling inexpensive options. if options are really inexpensive, i'd rather buy puts. >> how do you explain expiration? >> three to six months time frame. you really put time on your side when you do that. options decay the most within that time frame. >> okay. let's get to your trade. walk us through why you chose euro next. >> the stock has been beaten up a lot lately.
6:10 am
a lot of the fear about the stock is that volumes were decreasing on the new york stock exchange. one of the areas of growth in the market is listed derivative market, which fits right in with this show. new york stock exchange is really well-positioned in the list of derivative markets. kind of a growth story that people don't look at. they own a lot of options exchanges in the u.s. and overseas. >> right. so what's a trade, dennis? >> the trade is to sell the june 25 call at $1.25. it fits all three parameters. if you look at the strike, up 10%. the yield that's going to give you is 4.5% yield. and the best part about this trade is it's four months. so you're going to get that 4% in a four-month time. so the -- if everything goes right on this stock, you can realize a 16% gain in four months. >> well, i'm really hoping that everything does go right in this stock because obviously all of us viewers and on the show alike as options traders we'd love to see options volume going up, so we're looking forward to that happening.
6:11 am
another really good point about this trade, i think, when you look at buy-writes, we don't always have an opportunity to do this. one of the things that's important is how expensive are the options compared to how volatile the stock is? and we have a chart to show how much higher the orange line here represents the implied volatility of the options on nyx. and the white line represents how much the stock is moving around. this is a situation where we're getting to sell premium on an elevated level. nice trade. >> that also pays a 3% dividend too. >> you may want to add to that playbook, dennis, we think about this all the time. there's been a lot of consolidation in the exchange space in the last couple of years. if you think this new york stock exchange could get taken out, don't use it up 10% for that 4.5% yield. that's something that you have to consider, in my opinion. we talked about this all the time.
6:12 am
i don't mind doing these buy-write strategies on big liquid stocks. you may not get 4.5% yield on it, but you know they're not getting taken out. and that's one thing you want to focus on. >> dennis, do you think it's a takeout candidate? >> no, they're in the motive taking other people out. i don't know who is going to buy new york stock exchange. they're squared up against the nasdaq. >> if they do -- >> it's not that bad of a problem. >> all right, dennis, always a pleasure. nice to see you. >> good to see you again. coming up next, the stock up 6% on the week, but dan gave you an options strategy that was up more than 60%. and there's even more money to be made on his trade. find out how he did it and what his next move is after the break. time for pump up the volume. the names who were heating up the options traders sizzle index this week. founded in l.a. this arch rival of wrinkles using a famous toxin for the famous touch-ups and even though a flaccid forecast put frown lines on many this week, they're
6:13 am
betting on a beautiful future for this cosmetic colasses. who is it? bull market or bear, traders are always hungry for ideas. they find them at td ameritrade. trading's all about strategy. and strategy... is all about information. so i start my trading day... with td ameritrade's morning perspective. that's interesting... or, look at this... i can mine their weekly webcast for ideas. this is what i need. of course, ideas are just the start. so now i can drill down. heat mapping... heat mapping shows me where the money's moving. 2,500 stocks... one quick glance. cold... cold. hot! right there. look at this-- pattern matcher... pattern matcher spots technical patterns, automatically. wow, look at that.
6:14 am
look at that head and shoulders right there. it's like pattern radar. pattern x-ray vision. plus, this amazing gadget... called the telephone. i can call td ameritrade anytime and talk trades, strategies. anything. that's where the action is. td ameritrade. built by traders for traders. announcer: trade commission free for 30 days plus get $100 cash, when you open an account.
6:15 am
6:16 am
undervalued. so we don't know if there's just people expecting a pop to the upside or the possibility to spin that off. but that's the chatter about the eye care business. >> time now for the upside call where we tell you how to manage a winning options trade. told you to sell cisco stock, up 6% since then, but dan's never been happier and here's why. >> reporter: your mission should you choose to accept it, playing cisco for a move higher while protecting yourself from steep losses.
6:17 am
and that's exactly what dan did with cisco. >> look to do some stock replacement. >> dan, just because we're using a cheesy spy theme doesn't mean you get to speak in code. let's translate. dan thought cisco's stock could sink heading into earnings. >> going into earnings next week, you can see a very similar situation you saw in microsoft. >> but selling all of the stock would've taken him out of the game. so instead dan sold the cisco shares, pocketed that money and used it to buy an in the money call spread. and that's what's called a stock replacement strategy. you sell your stock and use that money to buy options, risking much less to possibly make more. so back to dan's mission -- despite his worries about cisco, he thought it still could trade higher. so he bought the march 23 call for 80 cents. now dan needs cisco stock to
6:18 am
rise by more than the cost of the trade or above 23.80 by expiration. but won't spending so much blow your cover and risk the mission? >> selling one march 25 call for 20 cents. >> you sly options trader. so to spend less, dan then sold the march 25 call and collected 20 cents. between the 80 cents dan spent buying one call and the 20 cents he took in selling the other call, dan cut his cost by 25%. now he only needs cisco stock to rise by more than the 60 cents he paid for the spread to make money on expiration. but in exchange for cutting his costs, dan also limited his profit to the difference between the strike of the call that he bought and the strike of the call that he sold. since the time of the trade, cisco shares have rallied about 4%. but dan's call spread is up multiples of that. now dan must make a choice.
6:19 am
that's because there's money left in his options trade. so should dan take profits now or stay cool and hold out for more? options actions fans are hot on dan's trail and they'd all like to know the same thing. what will dan do now? i know you're all dying to find out, but a little patience here, because before we get to that, we want to talk a little stocks versus options. had you bought 100 shares of cisco, you would have risked $2,300 and made 6%. but dan's call spread risked $60 and up more than 65% and there's still money left in that spread. so dan, what are you going to do? >> first of all i'm going to tone down the dramatics about the percentage gains on the trade. we talked about it last week after a pretty rough week in the market. and there was reason that we saw the way intel and microsoft and some of these big tech names had sold off after very good earnings.
6:20 am
sometimes these things make perfect sense. well here we are now. it's a different week. and you know, the stocks higher, it traded very well on the choppy week. and the only thing i would do, i believe the stock is going higher. you leave it on and capture the full potential or the one thing you could consider, if you think the stock's going much higher, you cover that 25 put. i think it went out at about 35 cents and you're naked long that call. and you just kind of stick with the thesis and ride the trade out. >> this is a stock replacement strategy. so that required you essentially to sell that stock. it's a stock that you said acted very well during a very volatile time. what do you do? if you're a trader out there, you're regretful you sold that stock. >> you are and you aren't. you're also worried about downside. and we said it last week that this was a risk management trade. helps you sleep at night if you're worried -- >> everything that happened this week, if you would have actually done a stock replacement strategy, you have to be patting yourself on the back.
6:21 am
there were a lot of points this week where everybody who didn't do one of these is probably wishing they had. and obviously he was making a directional bet, right about that, and also expressing some concern about what might happen in this week. maybe not in this stock, but this week for stocks generally, certainly demonstrated why you sometimes want to be hedged. >> and this would have been very different than keeping the stock and buying a put. that stock's up a ton of capital because you have to be a long that stock, you have to continue to pay that stock. we talk about that a lot when you're selling puts. and it's a problem for put sellers. but for dan, he's collecting all of that money. he gets to pay -- gets paid interest on it. this is a much different trade and much better trade. >> hey, listen, and some day all you stock traders out there may start to come around after watching a few more volumes of options action. but this gives you different prerogatives. and you're not just sitting there long a stock in a market that you're scratching your head and not so sure what to do. because a lot of times when traders sell their stock position they're apprehensive to get back in. what this does is i define my risk into an event that could
6:22 am
have been volatile. >> let me ask you this, we're in a very different place than where we were a week ago. for stocks have done pretty well, they're in the portfolio and pretty much weathered the storm. is this a strategy you would want to use for those winners this week? >> it might very well be. it depends -- now, you know, it may very well be. it depends on the stock. some stocks are doing very well and we saw that in technology. >> well, the important thing that we've noticed is number one, obviously stocks are moving around a whole lot. that obviously sets up well for these types of strategies. so yes on that count. and secondly, i don't think that options have gone up quite enough in view of how much volatility we're actually seeing. so yes on that count too. i think that buying premium here and doing it in a spread trade like this is really good trade. >> okay. got a question out there, send us an e-mail. we'll try and answer it during our options action 101 extra. and just so you know, i do read every one of those e-mails. it is your chance to ask a question. our chance to educate you and that's right after the show.
6:23 am
>> get more "options action" with our news letter delivered directly to your inbox packed with information and analysis. this is the extra edge you need. it's free when you register or visit the center. traders at td ameritrade are a demanding bunch. in fact, they want it all. you know, when i place an order, don't just fill it. get me the best available price. a better price means more money in my pocket. that's why td ameritrade's proprietary order routing technology consistently seeks the best available price. i've got quotes, charts, watch lists. just the way i want them. mission control? right here. command center 2.0 lets you customize your trading space. no risk, no reward. but i need to know what the risk is. my secret? backtest... backtest... backtest. strategydesk lets you backtest your trading ideas to help you choose the best ones and it's free.
6:24 am
with superior tools like these, traders get what they want. it's trader heaven. call or go to tdameritrade.com. independence is the spirit that drives america's most successful investors. announcer: trade commission free for 30 days, plus, get $100 cash when you open an account.
6:25 am
6:26 am
it is time now for the final call. the last word from the options pits. scott, what do you say? >> heads up. volatility did go up a little bit this week. but pay attention to the vix. as long as it continues to make lower lows and lower highs, then volatility is fairly priced. >> danny? >> if you're long las vegas sands into earnings next week or the week after, you may want to keep a close eye on what's going on in china and not so focussed on our reversal here in the markets. and keep an eye, put spreads may make sense in that event. >> and mike? >> i'm going to address what happened earlier with nyx. one it's interesting because the premium of the options is relatively high. the other thing is what he was highlighting about increased derivative trading, if you look at the cme, it's trading at about twice as much as earnings metric wise.
6:27 am
one of the other things is sell puts, do a risk reversal. you could consider that buy-write if you're considering a more bullish play like dan. >> looks like our time has expired. we'll see you here next friday 8:30 p.m. on cnbc. ever want to look over the shoulder of a seasoned stock trader? well, here's your chance... i'm running strategy desk from td ameritrade to set up a trading strategy based on how i think the market's trending-- right now i'm looking at a 20-80 stochastic cross. now, i could be running multiple strategies... my own tweak or some combination-- but for now--this is good... this is strategy desk, advanced technology for traders from td ameritrade. it's designed specifically for traders.
6:28 am
with strategy desk i can compare the 20-80 with other strategies and back-test them all. multiple strategies. multiple stocks. over time. and i can look at that at the symbol level or have it charted out for me more visually. and i'm not trading on emotion... a buy here...a sell here... there you go. i just hit a buy point and strategy desk fired off a trade. once you trade with it... you won't want to trade without it. td ameritrade. independence is the spirit that drives america's most successful investors. announcer: trade commission free for 30 days plus get $100 cash when you open an account.
6:29 am

13 Views

info Stream Only

Uploaded by TV Archive on